Corporation history

A form of business organization in which the capital of the firm is supplied by shareholders. As owners of the company, shareholders are liable only for the amount of their investment. Unlike partnerships, shareholders have no further risk or obligation beyond the percentage that their investment represents of the firm’s total equity. The proportion that a shareholding represents in the ownership of a corporation is determined by dividing the number of shares owned by the total amount of outstanding stock in the company.

Before corporations came into common use, partnerships were the traditional form of business organization. A partnership is a form of company ownership whereby the equity of a firm is privately held by two or more individuals. Each individual shares in the profits or losses of the partnership equally unless some other arrangement has been made limiting the share of a partner. In that case, an individual may be a limited partner rather than full partner. Partners also share any liabilities the partnership may incur in the course of business. Each partner may act as agent for others. As a result, partners bear the full risk of the business.

Partnerships were the first form of business organization beyond the sole proprietorship. Traditionally, new partners cannot be admitted to a partnership unless the partners agree. Admitting new partners is the method used to enlarge the financial base of the partnership or gain new expertise. But the form has had its drawbacks. Any capital that the business accumulates as a result of its activities is shared equally and, as a result, may be transient. When a partner retires or dies, he or she is entitled to withdraw capital. As a result, the equity of the organization diminishes unless a new source can be found to replace it.

As the economy grew larger in the 19th and early 20th centuries, many firms decided to incorporate rather than continue as partnerships. By doing so, they had access to more capital and also limited the shareholders’ liability in the firm to the amount of their equity holding. Regulations from the state and federal level also made partnerships somewhat dated in some industries, since capital requirements for banks and securities firms (for example) were raised, and firms were required to have access to capital markets in order to raise fresh funds. Partnerships generally are too small to be able to access funds from the markets and traditionally rely upon new investment from newly admitted partners or retained earnings from continuing operations.

The first corporations traced their history to the mercantilist trading companies established in Britain and Holland in the 17th and 18th centuries. Incorporating on a smaller business scale occurred later in the 18th century. Firms began incorporating in the United States after independence, but the process was slow. At the end of the 18th century, some banks and insurance companies began selling stock in order to expand their operations. One of the early stock companies was the government-chartered BANK OF THE UNITED STATES. The movement continued into the 1830s, and the early canal companies and RAILROADS were incorporated in order to raise capital. As the country grew, raising capital became a primary concern because many of the early industries, such as the railroads, were capital intensive and required funds beyond the financial capacity of partnerships or sole proprietorships.

The trend toward incorporation was aided by developments in the stock exchanges. Many exchanges originally were local markets, located in the major eastern cities. In order to list a company on an exchange, thus helping to market its name, incorporation was necessary, so the process went hand-in-hand with stock exchange trading. As more investor money found its way to the exchanges, more also became available to bring new companies public.

After the Civil War, business entered the phase of MANAGERIAL CAPITALISM, and the modern corporation, run by a professional managerial class, was born. Companies could now be ensured a viable succession that did not depend upon the founder or the founder’s family to run the business. At the turn of the 20th century, the U.S. STEEL CORP. was formed by J. P. Morgan in 1901. It was the first company to have more than a billion dollars of assets on its balance sheet and was the most widely held company of the day. Many more giant companies followed in its wake, including AT&T and GENERAL ELECTRIC, became widely held, and remained so for decades.

Business expansion was rapid after the Civil War, and many new companies were incorporated. An obstacle to the largest companies was the antitrust movement that emerged as business consolidation increased after 1870. Companies purchasing others were organized into trusts and became the predecessors of the modern HOLDING COMPANY. Often, the stock in these new forms of organization was held by relatively few shareholders. After the consolidation of many oil producers into the Standard Oil Company, the trusts were required to find states where local laws were friendly to companies that did much of their business out-of-state. As a result, many companies were incorporated in Delaware and New Jersey.

During the 1920s, a record number of corporations emerged, many in states of convenience. The post–World War I period witnessed the greatest growth in corporations registered since the 1880s and 1890s, and the trend lasted until the stock market crash of 1929 and the Great Depression. Studies subsequently appeared examining the ownership of many corporations, including the demographics surrounding their shareholders, but the number of incorporated companies continued to grow. Listings on the stock exchanges increased in the post–World War II period, along with a record number of MERGERS that continued to reduce the number of corporations at the same time that many new ones were being registered.

Business corporations are the most common types of corporation, but other types do exist, including single-person corporations, government- owned corporations, nonprofit corporations, and municipal corporations. The major advantage that corporations, especially business corporations, have over partnerships or sole proprietorships is that they are potentially able to raise significant amounts of capital. In addition to selling stock, they may also borrow bonds and COMMERCIAL PAPER and sell preferred stock.

In the 1980s and 1990s, variations on the single stock company emerged, with many corporations establishing subsidiaries that stood alone and had their own stock structures, with shareholder profits depending on the revenue of the subsidiary rather than the parent company, as had been the case in the past. As business risks increased over the years, the number of incorporations increased in order to shield principal owners from risk while at the same time increasing the total number of shares outstanding.

See also ANTITRUST; BANKRUPTCY; MORGAN, JOHN PIERPONT; MULTINATIONAL CORPORATION.

Further reading

• Beatty, Jack. Colossus: How the Corporation Changed America. New York: Broadway Books, 2001. 
• Berle, Adolph, and Gardiner Means. The Modern Corporation and Private Property. Rev. ed. New York: Harcourt Brace, 1968. 
• Chandler, Alfred D., Jr. The Visible Hand: The Managerial Revolution in American Business. Cambridge, Mass.: Harvard University Press, 1977. 
• Micklethwait, John, and Adrian Wooldridge. The Company: A Short History of a Revolutionary Idea. New York: Modern Library, 2003. 
• Nohria, Nitin, Davis Dyer, and Frederick A. B. Dalzell. Changing Fortunes: Remaking the Industrial Corporation. New York: John Wiley, 2002.